~ Seeking Understanding at the Grand-Historical Scale

The Purpose of War

In the 1980s, a term from the business world entered the public consciousness: hostile takeover. In any other context, it would sound like a rather maladroit euphemism for a violent activity. One can imagine a mobster congratulating his lieutenant on successfully performing a hostile takeover of 3rd Street, by which he means that all the protection money is now going to their coffers instead of their rivals. And, in fact, that was very likely the connotation the people who coined the term were going for.

In actuality, though, a hostile takeover is a completely legal, non-violent procedure. It’s an outgrowth of the age-old laws undergirding corporate governance. Under these laws, the CEO of a company is technically an employee of the company. In theory, he’s no different than the lowest member of the organization chart. He has broad authority to exercise in how the company operates, but like any other manager, he is supposed to be held accountable by his bosses.

The catch is that the CEO is at the top of the traditional pyramid. So who can he then report to? The answer is found in the institution of the board of directors. The board is elected by the shareholders in a manner provided for by the governing corporate charter. They are not tasked with any formal power over the company’s operations. Instead, it is their sole duty to determine who the CEO is and what his compensation structure ought to be, based upon his performance (and, theoretically, the performance of the company).

It is common nowadays that the regulatory function intended to be provided by the board of directors is inoperative. Most board members are financiers or CEOs of other companies who don’t take their responsibilities very seriously. In practice, it is frowned upon for board members to have significant fractions of their personal wealth tied up in stock of the company for whom they serve, because any trades of that stock will be looked at very carefully for evidence of improper insider trading. So what usually ends up happening is that the same set of CEOs and big bankers serve on each other’s boards and routinely vote each other large raises for even average performance. Everybody makes money; everybody wins.

A takeover of a company occurs when there is a stockholder election that replaces the board. The new board, then, quickly ousts the incumbent CEO and replaces him with someone else. Presumably, he then goes on to change the course of the company, implementing policies that the previous management did not want to implement.

A takeover is said to be hostile when the incumbent management and board actively resist this shift. Generally, this rapidly becomes a very expensive proposition. That’s because the two opposing camps are both attempting to acquire control over enough stock in the company that they can win the upcoming election. And SEC rules force investors to make public their intention to purchase large chunks of the stock, so it’s impossible to do this by surprise. This means that the stock price inevitably jumps rapidly, as investors that were just holding the stock passively sell out at the newly increased price to factions that are actively contesting the election.

Why did this practice become so much more common in the ’80s that the term for it entered the lexicon of the general public? It turns out there are two sides to the answer. The prosaic half is that a few entrepreneurial financiers discovered a new, interesting tactic. They found out that it was possible to borrow a lot of money on the corporate bond market by issuing so called “junk bonds” (bonds promising very high yields with a correspondingly large risk of default) and then use the cash to fund a hostile takeover of a target company. Then, once the company was in their control, its assets could be sold off and the money used to pay back the issued bonds. Anything left over was pure profit.

Naturally, this was quite unpopular. Breaking apart existing, seemingly-functional companies for no seemingly good reason was seen as the worst kind of short-sighted greed. After all, anyone who worked for a company targeted for this takeover would be thrown out on the street. And the executives of this company, who had grown accustomed to the perquisites of rule, were equally appalled by the fact that the insurgents didn’t have any desire to run the company. They were taking it over simply to kill it and sell the corpse. So this brought both workers and management together in their resistance to this sort of hostile takeover.

But it is in the other side of the answer that all the insight is hiding. The above is the well-known story. But very few people ever stopped to ask the key question: how can this possibly work? How does it make money? After all, the whole hostile takeover process is very expensive. You need to raise a bunch of money at above-market rates and then use it to pay off a bunch of shareholders in the hopes that you can seize control of a company and then liquidate it.

The value of the stock is driven by the expectations of the dividend stream it pays out, which is driven by the expectations of profit the company is generating. This is the value of the company “alive”. The value of the corpse, on the other hand, is just the asset value the company holds: the buildings; the scrap value of the capital machinery; the office furniture; etc.

So this liquidation value has to be much greater than the expectation of profit from the target company in order to pay for the transaction costs and yield a profit. In other words, the only way the math works out is if the target company is worth a lot more dead than alive. The greater this disparity, the more the incentive to take over the company.

Think about what this means for a moment. If the company is worth a lot more dead than alive, that means that the company’s assets must necessarily be badly mismanaged. Whatever justification the firm may have for continuing to exist is pretty weak if you can make way more money by just holding a garage sale to sell off the assets. The greater the profit our junk bond wielding hostile takeover artist makes, the greater the implicit condemnation of the previous management. They were granted control over all of these resources, in this organization, and through the alchemy of incompetence they managed to turn the gold inputs into base lead.

Sometimes, among certain sorts of radical, the operations of nation-states are imagined as if they were corporations. Anarcho-capitalists, in particular, like to use this language in order to strip any luster the existing terms for government might have. Instead of the King or President, he is merely the CEO of an organization that claims to be the exclusive provider for security services and contract enforcement within a certain territory. Others, who bring with them a deep distrust of the corporate form, like to use it to delegitimize the very idea of government (after all, they argue, it’s just another oppressive company).

Personally, I don’t find either of these lines of critique terribly interesting, in and of themselves. The key problem is that governments aren’t classical firms in a sociological sense. They form differently, they operate differently, and they rely on different modes of thought and organization than a typical commercial firm. It is not useful to elide the distinction between the two forms.

However, I think there is something there worth considering in the context of the discussion on hostile takeovers. Let’s model the government of a country as a single for-profit entity, for the moment, regardless of its internal structure. So, for instance, the US government wouldn’t just be the federal government. Each state and local government would count as branches of the same organization.

In this model, a government’s revenue stream is the tax revenue from the people under its jurisdiction, however collected. For this purpose, asset forfeiture, criminal penalties and fines payable to the State, and tariffs levied on foreigners all count as taxes. Its expenditures are the sum total of all of the operating expenditures, transfer and interest payments, and so on that the government pays out. The difference between the two we can call operating income or profit.

Now, just like in a common company, the profit can be retained by the State or paid out to the shareholders. The analogous operation to retaining the earnings would be to spend the windfall on extending the operations of the State or to build up savings. Paying out to the shareholders would look something like issuing tax rebates, arranging direct payments to various constituents, or moving money to the President’s Swiss bank account. Of course, this isn’t the way any actual government keeps their books. But with this model we’re aiming for functionally descriptive, so that’s all right for now.

So, when put this way, it rapidly becomes clear that there’s simply a phenomenal amount of money moving through governments. The right to collect taxes in a territory is obviously a really big deal. And when you look at it this way, some territories are worth a lot more than others. For instance, Greek tax revenues are notoriously poor because people often just don’t pay their taxes. Germans, on the other hand, pride themselves on fiscal rectitude and barely have to be policed as they shovel gold into the treasury. And countries with functioning First World economies are worth way more than your typical sub-Saharan basket case.

The analogy to a hostile takeover in this model is pretty clear: war. The transaction cost, equivalent to the effort to buy up enough of the outstanding stock, is the total of the costs in blood and treasure to create an army to annex the target nation. And the benefit to a successful operation is the right to the tax stream and the opportunity to reorganize the acquired territory, analogous to how a CEO can juggle around the divisions of a newly-acquired company.

Generally, the cost to conquer a country is proportional to its tax revenues. Advanced, industrial countries can build and afford to field armies with technically sophisticated equipment. And the larger the country, the more soldiers it can generally rely on to rally to its banner. That’s why the USA has a dozen supercarrier battle groups and Libya has some dudes driving around in Toyota pickup trucks with .50 caliber machine guns bolted on the back. This is analogous to the price of the stock of a company being driven primarily by its financial fundamentals.

Therefore, war is profitable in this sense for the same reasons a hostile takeover works in the world of commerce. When a state is mismanaging a territory such that its military power is substantially beneath the expectation for its tax revenues, or its tax revenues are substantially below what they could be under better management, there is opportunity for profit. Just as with companies, it is possible for the potential tax revenues of a country to be below their liquidation price. In that case, the profit-maximizing thing to do is to have the army carry away all the stuff, kill or enslave the denizens, and then parcel off the real estate. A good historical model for this is how the Romans dealt with the smaller tribes they encountered as they began their rapid expansion across the Mediterranean.

This is neat! We are now led to the answer to the age-old question. War: what is it good for? To ensure the rise and spread of high-quality governance.

Without the threat of war, there is no reason for the incumbent leadership to maximize their operational efficiency. Just like how, in the ’70s, there was no need for the executives of American firms to make their companies more efficient and maximize shareholder return. Instead, they could redirect big chunks of money to their own perks and to generous labor deals, all the while counting on their friends on the board to reward their largess with big cash bonuses.

This also has some interesting corollaries. As is well-known, interstate violence has gone down sharply since the Second World War. And since the end of the Cold War, it has been the policy of the world-dominant power to not allow states of any size to grow via conquest. New states can be created through secession, like the Czech Republic and Slovakia being created from the dissolution of the former Czechoslovakia. This policy was the casus belli for the first Iraq War, the intervention in Yugoslavia in the ’90s, and is the basis for the guarantees being extended to Ukraine in the present crisis.

This reduction in organized violence has been lauded as a great and wonderful thing by virtually everyone who has noticed the trend. But if the preceding argument is correct, it means that it has also greatly reduced the incentives for good government on the behalf of the rulers of virtually every nation on Earth. This is almost certainly bad.

I believe that we can see the effects of this most clearly in the history of post-colonial Africa. Most African states have gone through periods of hilariously bad government since the departure of the colonial powers, making even the casual cruelty of the Belgians in the Congo look tame in comparison. Civil wars and famine are common, refugees have fled countries by the millions, and most every industry is almost entirely based upon resource extraction. Very little value is added through manufacturing or services throughout the continent.

Traditionally, upon news of any of these governance failures getting out, foreign countries would have started circling around like hungry sharks. A country that can’t feed itself is also one that can’t defend itself. A country whose security forces are actively fighting against each other is ripe for division and conquest. And once the foreign troops roll in and take over, it’s in their interest to get things running smoothly again to maximize the tax revenue.

This is the key feedback mechanism by which the quality of governance has actually gotten better over time. States with better institutions conquer ones with worse ones and reorganize them along more efficient lines. If the new gestalt entity cannot scale to the new size, it will then fall apart after a successful secession movement, tending to leave two or more successor states with institutions inherited from the previous conquerors.

But nowadays, that cycle is broken. What generally happens now is that foreign governments and NGOs come in and attempt to ameliorate the suffering with direct aid. But because they cannot (or will not) take political control over the territory first, they end up having to work with whoever happens to be standing around with the most guns. This is why you often see news stories about warlords in Africa controlling access to food aid and crucial medicine. From the state-as-firm financial perspective, this foreign aid is just tax revenue that isn’t a function of the native productive capacity. In fact, it has a negative relationship, since a country gets more aid the worse the local governing bodies do their job.

Some seemingly crazy stuff follows. For instance, it would behoove an efficient charity with an interest in improving life in Africa (like, say, the Gates Foundation) to spend its revenue on sponsoring a coup d’état in a misgoverned African nation. Then, once the country was conquered, bring in a bunch of outside experts to put it under modern administration. Then, use the resulting explosion in tax revenue to bootstrap a wave of conquest across sub-Saharan Africa. In a few years, you’d have functional, self-supporting institutions everywhere. Then the problem of providing aid would be trivial. If you even still needed it.

The Gates Foundation could probably get around the current prohibition on states annexing other states by just not formally annexing them together into one political entity. All the fighting could be done with special forces guys, mercenaries, and assassins instead of regular army soldiers. As long as the same people end up calling the shots in all of the countries, it wouldn’t hurt the plan to run the local governance through proxies for legal reasons.

The real, insurmountable problem with this plan is that it’s unabashedly colonialist. It is based entirely on the idea that Africans have, on average, worse institutions and talent for rule than the available foreign equivalents, and that therefore it is good and proper that they be ruled by foreigners. The very idea smacks of racism and is therefore verboten in this day and age. So we get chaos.

Until the age of war returns.

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4 thoughts on “The Purpose of War”

I find the idea of the Gate’s Foundation hiring mercenaries (I assume PMCs) to bring order and more efficient governmental rule over areas to be pretty hilarious. This is partly because I’ve met the people who work at the Gate’s Foundation and those kind of charities are completely incapable of recruiting people who could even imagine militarily augmented charity work.

How does this line up with US intervention in places like South America and Iraq? Or even past examples, like South Korea?

Secession movements don’t really match up with the corporate mergers/acquisitions analogy. The reason is that there isn’t any provision in any corporate law I’m aware of that enables subdivisions to spin themselves off in a hostile fashion. A secession movement in the corporate world necessarily has to conquer the CEOs office first.

Although, now that I think about it, that kind of works. In a militarily contested secession, after all, the war isn’t over until the central power accepts the breakup. You don’t have to oust the CEO to break up the company; you just have to get him to sign off on it.

Still, I’m not sure how much value there is in following this train of thought too much farther. Like I said in the essay, I don’t really like the analogy in and of itself. The only value I think it has is to reveal why war makes sense at the longest time scales. It’s not necessarily just senseless destruction, waste, and tragedy.

I describe wars of complete conquest here as the extreme case. You can think of more limited war and interstate diplomacy as points along the same spectrum. It’s intended to be closely analogous to (if not identical to) the way Clausewitz described war as politics by other means.

So, to take Korea as an example, had the US successfully conquered North Korea, they would have unified the country under Rhee. Having been prevented from doing that by the Chinese Army, the US grudgingly accepted the resulting status quo. The same thing happened from the North Korean/Chinese side in reverse: they sought complete conquest and when that proved impossible, ended up in a stalemate they could live with even if it wasn’t ideal.

Most of the South American interventions were a little less straightforward. During the time period, it was common knowledge that the US could conquer any of the South American nations with little effort. After the Monroe Doctrine was de facto acknowledged by the European powers, there was no countervailing great power to prevent it.

But the factions in the US that wanted to conquer and annex these territories lost the Civil War. So, instead of annexing and reorganizing these countries directly, the US basically ruled them as a very decentralized imperial power/hegemon. The nations of South America could do anything they wanted unless they offended the US, at which point the State Department would complain. If they persisted, the Navy and the Marines would show up and compel cooperation.